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In Chapter 4 of our featured book, Common Sense on Mutual Funds, John Bogle advocates simplicity in investing. He states, "So, much as I would urge you to commit your investments to an index fund approach - or at least to follow an approach using index funds as the core of your portfolio - I'm going to offer you another simple approach: eight basic rules."

I will not present his rules. Read the book. It is well worth the effort.

I will quote a single paragraph on page 105 at the end of the chapter. "Indexing will probably never rule the entire world - only part of it! But indexing works so well only because most funds - burdened by excessive costs, promoted with claims of past performance success that is highly unlikely to be sustained, and managed with strategies that call for a short-term focus - don't work very well. For that reason, the index fund - which works very well indeed - has proved to be the optimal way to realize the highest possible portion of the return earned in the stock market. But it need not be the only way."

These remarks apply not only to mutual fund owners, but to all investors. Beware of excessive costs. Set realistic goals. Focus more on the longer-term.

Have fun.

John R.

Greetings John

I will not present his rules. Read the book. It is well worth the effort.

I agree. Interesting seeing you go chapter by chapter with a fresh look at things. Most of the book still applies today and will apply tomorrow. One could do much worse than to use this book as their foundation for retirement planning. OTOH it's always good to review your strategies. Life does not occur in a vacuum.

For that reason, the index fund - which works very well indeed - has proved to be the optimal way to realize the highest possible portion of the return earned in the stock market.

This is necessarily true for the majority of equity investors, because the majority cannot outperform itself. However, this fact cannot be generalized to his implied conclusion that most Americans would be better off in equity index funds. After tax corporate profits are not high enough to provide a decent return for most Americans. For most of market history, only a small percentage of Americans owned most of US equity. There is a point where equity, indexed or not, is no longer such a good deal. Index funds can only efficiently distribute the profits that the underlying asset class actually generates. His advice to stay the course regardless of valuations could be dangerous if enough people follow it. Of course, it will greatly benefit the first people in, as they will profit from expanding earnings multiples. This can go on for decades.

All of John Bogle's remarks are directed to mutual fund investors. His advocacy of index funds is always in contrast to actively managed funds.

He has described the problem of valuations. He wrote about lower projected returns because of valuations well before the bubble had ended. His predictions did not come true. He still expresses caution, but he does not rule out the possibility that a super bubble will follow the bubble.

IMHO, I think that he realizes that valuations are way out of line. It isn't a matter of whether there will be bad years in the future. It is the matter of when they will occur.

I view the evidence as making the case for caution more and more compelling.

Have fun.

John R.

Chapter 4

On page #101 "...I am not persuaded that international funds are a necessary component of an investor's portfolio".

Most asset allocation models seem to always include international as part of the equity mix (ususlly about 10%.

In another passage in the book (I can not locate it at this time) Mr. Bogle indicates that international investing should not be more that 20% of your position and can be as low as zero.

I have little international exposure myself as I feel that US stocks are mainly international in natue anyway.

Why do so many knowlegable individual investors insist on including 10% in international?

Greetings mickeyd:

In another passage in the book (I can not locate it at this time) Mr. Bogle indicates that international investing should not be more that 20% of your position and can be as low as zero.

It's actually on the next page:

My best judgement is that international holdings should comprise 20 percent of equities at a maximum, and that zero weight is fully acceptable in most portfolios.

Why do so many knowlegable individual investors insist on including 10% in international?

Are you implying that those that include int'l are showing a lack of knowledge? We could prolly debate which side knows best for years. In fact, we have. Of late, my int'l holdings are performing better than several other asset classes (including everybody's fav LCB). I also see them with low correlations compared to various classes. And, viewing the Callan Periodic Table of Investment Returns, U.S. didn't always come out on top. The MSCI/EAFE had several years in the top spot according to the table, from 1980 to the present.

http://www.callan.com/resource/periodic ... pertbl.pdf

That is just a very quick list of my reasons to include int'l in my portfolio.

Bookm

Greetings Bookm

Ok. Just to see the other side of things a bit, here is a telling Bogle quote:

There are unusual risks when you invest internationally, currency risk being the most notable. I don't see why you would take that extra risk in the absence of some clear evidence that international returns were higher. Of course, when you get broad international diversification, you have a lot of national risks to deal with. To reduce the risk in your portfolio, you're buying riskier investments. You ought to ask yourself if, fundamentally, it's a good idea to increase risk to reduce risk.

Hey Bookm,

Thanks so much for you insight and wisdom.

I was aware of the Callan site but had not referred to it recently.

I see your point regarding the MSCI/EAFE index. It contrasts favorably the S&P 500/Barra Index. I generally use the DJ Wilshire Index rather that the S&P 500 but the comparison is similar.

Also thanks for the 'next page" reference, I knew it was in there somewhere.

Still not convinced, however I am more informed thanks to you.